Buying a home is a daunting process. Let’s say you’ve been smart and done all of your homework. Your finances are sound, your income is stable, you’ve used a mortgage calculator and have saved and scrimped in order to accumulate a down payment. You know where you want to live. Now you’re in the same pool as thousands of other homebuyers who have done the same, all fighting for the lowest rung on the property ladder.
How on earth do you negotiate a smart home purchase in a seller’s market?
Toronto and Vancouver get a lot of press for being the hottest real estate markets in Canada, but according to statistics released by the Canadian Real Estate Association (CREA), the national average sale price climbed 11.2% in June from one year ago; net of Greater Toronto and Greater Vancouver, it advanced 8.4% year-over-year. No one knows when the markets will cool, so when you find that ever-elusive unicorn – a property you can afford in an area that you love – in a market with low inventory and/or sky-high prices, you want to jump on it immediately.
But as Toronto real estate agent Holly Fedorczenko
explains, there’s a huge education process, especially, but not limited to, first-time buyers. More buyers are beginning their research on their own these days but they’re still coming to mortgage and real estate professionals with misconceptions and unreasonable expectations. “They get excited about properties and then they see what they sold for,” she says. “You can prep them all they want, but until you actually show them firsthand, they don’t really understand.”
Set limits before you start house hunting
It’s terribly easy to get swept away in the excitement of getting approved for a mortgage and finding the ideal property that you offer more money than you’d planned when you find yourself in competition with another buyer. In a TD survey of more than 700 prospective homebuyers, 18% of buyers are worried that they’re buying too quickly in order to win a bidding war. It’s understandable to want to get into the market while mortgage rates are favourable, but if that means spending more on a home that you can afford to spend, you’re going to end up paying more in the long run. “Set your limit, play within it” doesn’t just apply to gambling; it applies to buying property as well.
Regardless of what the market is doing, you’re the one who has to pay the mortgage every month, so it’s imperative to stay level-headed when making an offer. A mortgage lender’s or a mortgage broker’s job is to tell you how big of a loan you can get, an agent’s job is to provide comparable home sales and offer their expertise when it comes to a particular market and the fair market value of a property, but it is the buyer’s responsibility to decide the maximum amount that they’re willing to pay for a home – and stick to it.
You’ll read it everywhere, but it bears repeating: financial preparation is key. What your bank will lend you isn’t always what you can afford, and you have to know the difference in these figures before getting into the game.
“The first thing I want to know is, have you been to a bank or mortgage broker, have you spoken them about your financial situation. Whatever they tell you is your max, we take 50-70k off the top,” Fedorczenko says. Buyers aren’t always happy about their newly reduced budget, but the process is a steep learning curve that first-timers have to get quickly. “They might have to adjust expectations, but there’s always ways of working around that.”
Vancouver agent Mike Stewart
says that being financially prepared is the biggest piece of advice that he can offer to prospective homebuyers. Speak to a mortgage broker before you do anything, and make sure you have the cash available for your down payment, whether it’s coming from friends, investments, or savings. This is especially true in a hot market that’s moving much faster than it can take to transfer funds between accounts. If you want to put in an offer on a property on Saturday, the sellers – and other buyers – won’t wait until Wednesday for you to transfer the funds from one account to another. And, Stewart says, “also be ready to compete. And compete and win. Because unfortunately, the meek and cautious are not getting properties in a market like this.”
Understand the market
Even with the staggering amount of information that’s floating around the marketplace, agents say that buyers still come to them needing a fair amount of handholding and education when it comes to wading through the murky waters of a seller’s market. Fedorczenko says that there’s a big issue with first-time buyers not understanding market value. Someone who buys a home that sells for $100k over the asking price isn’t necessarily overpaying if the seller has priced the property in order to encourage multiple offers, she explains. If you’re only looking at list prices and news headlines, you’re not picking up on nuances and getting the full picture. And for first-time buyers, it’s critical that you choose an agent who will educate you on fair market value so that you can adjust your strategy accordingly.
Stewart says that buyers who don’t know the market get really frustrated because they’re not getting what they want, especially when properties are selling for “significantly more than they think it would sell for.” Stewart and his team take the client’s lead and proceed cautiously if they’re gunshy, although, he adds, the cautious approach to buying real estate doesn’t work in a hot market. “Cautious people eventually realize that they’ve gotta be aggressive if they’re serious about getting a place.”
Keep on truckin’
In seller’s markets, disappointment is unavoidable. There are things that go in hot markets that don’t fly in others. Multiple offers, bidding wars, bully offers, and even buyer’s letters are all commonplace, and using one or more of these techniques can be the difference between you getting a home and losing out repeatedly. Fedorczenko says that agents and buyers alike need to be prepared to “go in guns blazing,” because the pressure is immense, and the resilience that’s required isn’t for the faint of heart.
For all of the emotional ups and downs on the homebuying roller coaster, it’s important to stay the course. Fedorczenko says that she’s yet to have a first-time buyer who hasn’t ended up in tears. “It’s hard to keep moving forward and bouncing back.” But the important thing is to make sure your finances stay intact and to keep looking at the properties that are out there. If you want to buy a home and have your financial ducks in a row to do so, then waiting to purchase is a gamble that could leave you priced out of the market.
Stewart says that he and his team sympathize with buyers in the Vancouver market. “In a normal market they don’t have to be as aggressive and prepared if they want to get a property. It’s just extraordinary market circumstances and so therefore if they want to get a property, they’ve got to take extraordinary measures.”
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